The Truth about Credit Card Debt: Good Debt vs. Bad Debt

The average American has approximately $8,000 in credit card debt, a net worth of $6,000 for renters and a net worth of $150,000 for home owners. What does this tell us? That having a home (and a mortgage) is almost essential for building wealth.

This means that you need to get rid of your bad debt ASAP, start building for the future by saving money, and acquire assets to increase your net worth. Okay. That seems like a lot. So let’s take this step by step.

1) Figure out what your bad debts are: They include credit card debts, medical debts, or loans for possessions that don’t appreciate or retain their value, such as cars, televisions, etc.

2) Calculate how much you owe in bad debt: Look at how much you owe, your interest rates, and how long it will take you to pay off the amount you owe with the payments you are making now. It could take you a very long time to pay off credit card debts, especially because these companies can charge you more than 20% interest on interest. And if you are only making the minimum payments you are almost surely only paying the interest on the card and not making a debt on the money you owe! If you owe too much in debt and are unable to make payments on your cards you may want to look at other options to pay them off.

3) Make larger payments on your credit cards; try to pay off twice the amount each month if you can. Or better, if you have an excess of savings, use that money towards your debt because you are actually losing more money than you are saving. However, keep an emergency fund (that covers six months of expenses) handy because you don’t want to go deeper in debt if something happens.

Focus on one card at a time a pay them off. If you can, transfer your balances to news cards that offer a 0% introductory rate. If you pay them off before the offer ends you will have saved yourself a considerable amount of money.

4) Once you have paid your cards off, try to put all the money you were paying for your credit card debt towards your savings. Try to find a money market account with a large percentage of interest, so you can maximize your savings.


5) Keep your eye on the goal. If your goal is to buy a house, make sure you have approximately 20% of the purchase price to put down, so that you will end up paying less in the future.

If you owe more than $7,500 in debt, learn how you can reduce your debt by up to 65%!